The world’s wealthiest people and family fortunes have been made in real estate investment. The fundamentals are obvious: everyone needs somewhere to live, the demand is increasing with higher population, and the supply is limited. As Mark Twain said about land, “They don’t make it anymore”. That’s a recipe for increasing prices.
As a first time home buyer property is the most expensive asset people buy and traditionally requires a deposit with a mortgage to be paid off over many years to come – a scary commitment in a much more uncertain world. That debt can be still worth taking on because of the many benefits of being a home-owner and the tax reducing incentives provided by government.
For a person looking for return on investment, real estate has many attractive aspects. Rising capital value, although not guaranteed, is one. Leverage or gearing is another: an asset can be bought for a fraction of its value. And tax deductions sweeten the deal.
However, it’s not easy to make all these factors pull together for a profitable outcome. Prices can plateau or go down so that there’s no capital appreciation. Debt service can be more than rental income. Property maintenance can bleed you dry. You can end up with negative cash flow, which has to be replaced from your other income. That puts a burden and a limit on acquiring a property portfolio.
During the hey-days of the ’80s and ’90s, many people made fortunes with traditionally financed property purchases, and with ‘no money down’ highly leveraged methods. As more people bought second homes, some for vacation, some for rental income, prices escalated. Everyone wanted a piece of the action, buying, flipping, and churning: borrow all you can and sell at a profit! You couldn’t lose.
Then, more recently, as tenants wouldn’t pay higher rent, property prices leveled off or went down. Flipping didn’t work, and as 2007 has shown, lax lending by US mortgage companies put under-capitalized borrowers under pressure. Houses didn’t sell. Loans weren’t repaid.
The real estate bubble burst.
But does that mean you can’t make money anymore with property investment? Can some people even expect to never own their own home?
Not if you have a better way….
You can learn how a grandmother made $652,000 in 18 months through cashflow positive property deals.
Tags: RealEstate